Underestimating the Cost of Flipping a House

Think back to the recent real estate boom years for a minute. If you watched any of the house flipping reality shows or read any of the hundreds of articles that were published about house flippers, it sure looked like everyone was making huge profits every time they touched a house….sometimes 40% or more. But did you know that house sale statistics paint a completely different picture?

In 2006 for example, 50% of house flippers in Boston, Pittsburgh, Key West and 4 different metropolitan statistical areas in California not only didn’t make the typical 25% -40% profits you saw on TV – they actually lost money. A lot of money. In Boston, for example the average loss was over $44,000 and in Pittsburgh the average loss was over $11,000. In most other areas of the country, at least 1 out of every 4 house flippers lost money. The average loss nationwide was over $16,000.

Now remember, 2006 was still a relatively good market…..things were starting to head in the wrong direction but it was still a far better market than todays. So how could so many house flippers lose so much money? One simple reason. They failed to estimate the cost of flipping a house accurately and ended up with too much invested. You saw it on the reality shows. A quick estimate/decision on how much money would be set aside for repairs and recklessly make your offer. If you happened to see any of the featured flashbacks – where they’d go back a couple of episodes to show what actually happened with a house that hadn’t sold by the time they finished the episode – you may have noticed that even some flips that were featured on TV didn’t turn a profit!

I’ve never been featured on the Property Ladder or Flip That House, but as a real estate investor in Cleveland, Ohio I’ve made my share of mistakes by employing this same method (which is taught by at least one of the real estate gurus): pick a round number repair figure cost based on a ten minute inspection and buy the house at a fraction of its true value….you can’t go wrong. Nothing could be farther from the truth when flipping a house. I felt very safe buying a two-family house at about 50% of its true value and still wound up losing $18,000! I completely underestimated repair costs because I wasnt thinking about all the small things that add up to a lot, like replacing all the mouldings in the house. I also ran into repairs I had never done before that I assigned an arbitrary value to….that turned out to be way too low. I got tired of the stress of not knowing what my true cost of flipping a house was so created an Excel based spreadsheet tool- the Rehab Offer Calculator- to help me accurately estimate all costs before I made my offer.